About the only bipartisan cheers in President George W. Bush’s recent State of the Union address came with his claim that the United States was “addicted to oil” and the inevitable proposals thereafter for various state subsidies to new energy research. Yet neither the diagnosis nor the proposed cure makes sense, since they bear little relation to the realities of the market.
According to the American Heritage dictionary, addiction is defined as a compulsive physiological and psychological need for a habit-forming substance. By this definition, the United States is not addicted to cheap oil, any more than it is addicted to water or soybeans; the substance is essential to keep the economy moving, but if an alternative were found the U.S. public would be only too glad to switch to it. The principal U.S. economic addiction is to cheap credit, an addiction fueled by the enablers of the Federal Reserve, but Bush proposed no significant remedies for that that ailment. In considering the problem of oil, however, the underlying easy money, negative-savings-rate, federal budget deficit environment is a big part of the problem; since Americans consume far too much in general, they will consume too much oil.
The U.S. economy is not addicted to oil. The majority of affluent or comfortably off U.S. consumers have developed a lifestyle that requires a huge amount of private transportation, which in the present state of technology involves burning a lot of petroleum. Choices have been made, notably the suburbanization of U.S. cities that began even before World War I. (Construction began on the Bronx River Parkway, the world’s first automobile divided limited access highway, as early as 1907 and the first section was opened in 1912.)
If cities remain compact, with development proceeding by means of apartments along major arteries, the primary means of transportation can remain bus and rail, as in Paris. With suburbanization, this becomes impossible because the size and cost of a rail or bus network of any given density expands as the square of its radius. Thus a radial subway or rail network that extends 20 miles from a city center has gaps in it, where the network is too far from much of the housing stock, and accessible only after a lengthy bus ride (generally making the total commuting time impossibly long) or with an automobile commute to the station. At that point, the automobile becomes essential, and whining about oil “addiction” becomes equivalent to whining about the public’s incessant demand for food and drink.
COMPLAINING ABOUT THE U.S. ADDICTION to oil is largely a cultural statement, akin to warning of global warming, by which the speaker’s credibility at leftist metropolitan cocktail parties can be assured. It is backed wholeheartedly by the global media, most of whom reside in city centers, use automobiles only sparingly, and refer to suburbanites among themselves as “bridge” or “beyond the Beltway” people. It is notable that oil company profits, most of which accrue to shareholders, are regarded with much more horror by the media than tech sector profits, much of which are embezzled in one way or another by that sector’s overpaid management.
This anti-oil snobbery has over the years had damaging effects on the U.S. economy. It was responsible for the Corporate Average Fuel Economy (CAFE) standards of the 1980s, which forcibly downsized U.S. automobiles through regulatory fiat, left the automobile market vulnerable to imports, and resulted in the invention of the immensely ugly and slightly dangerous Sport Utility Vehicle, which was through regulatory quirk exempt from the controls. The financial decline of Detroit was a direct result of CAFE, which placed the U.S. industry at a disadvantage to imports for decades because its fleet mix was affected more harshly by CAFE standards.
Conversely, anti-oil snobbery has perversely prevented the United States from taxing petroleum products at levels comparable to other countries. The unholy glee of the chattering classes in their attempts to make it more difficult for the non-urban to drive large cars and commute to work was noticed by the voters, who correctly took the view that more than financial motivations were involved. Thus increased gas taxes have always been deeply unpopular — far more so than their equivalent in general sales or other taxes.
BUSH’S STATE OF THE UNION ADDRESS was clearly written for cocktail party consumption, rather than as a rational contribution to policy. State-funded “research” at which money had already been thrown in large quantities by the Energy Policy Act of 2005 was further increased by 22 percent. No major advance has ever resulted from state-funded research in the energy sector but hey, there’s always a first time! Bush also announced the administration’s goal of reducing U.S. oil imports from the Middle East by 75 percent by 2025 — at current 21st century rates of progress that’s ten major terrorist attacks, eight invasions, six nuclear weapon panics and three oil supply crises from now, but the thought’s a good one.
Notably absent from the speech were references to Canadian tar sands, Colorado oil shale and drilling in the Arctic National Wildlife Refuge, all of which can be expected to make important contributions to U.S. oil self-sufficiency if allowed to do so by Congress and the environmentalists. Opposition to ANWR drilling, in particular, is a sign that the conversation has degenerated to the cocktail party level; when opponents of ANWR tell you that ANWR oil would supply U.S. oil needs for only 13 months, they omit to point out that a more likely usage pattern is to get 5 percent of U.S. needs for the next two decades, a much more strategically attractive prospect.
Even more than by its refusal to drill in ANWR, the economic un-seriousness of the U.S. political class is demonstrated by its pretence that ethanol, the favored alternative to petrol, must come from corn, wood stalks, soybeans or some other crop grown safely within the United States, preferably in the key presidential caucus state of Iowa, and therefore to be subsidized in return for campaign contributions. No mention was made of the sugar-cane derived ethanol program in Brazil which supplies 40 percent of Brazil’s vehicle fuel, at a price less than half that of gasoline, compared to the price of corn-grown ethanol that is only just competitive with gasoline at today’s price of nearly $70 a barrel.
The United States could reduce dependency on the Middle East by importing sugar-cane derived ethanol and save money doing so, even after deducting the cost of retrofitting car engines. Sugar cane is grown in hot, wet tropical countries, not in Iowa (except at exorbitant cost), but there are a whole host of such countries available, in the Caribbean and the northern reaches of South America, only one of which, Venezuela, is a significant oil exporter — in some cases, such as Haiti, the United States is committed to propping the place up anyway.
Ethanol burning in automobiles is even held by environments to be helpful as regards global warming — the rationale is that although ethanol, like gasoline, is a hydrocarbon the burning of which releases carbon dioxide, growing the sugar-cane involves the absorption of atmospheric carbon dioxide, and so the loop is closed. This is typical cocktail party arithmetic; it involves assuming that the land where the sugar-cane grows would otherwise be an arid wasteland devoid of plant life. However, if we can avoid environmentalists passing fatuous treaties hindering a partial switch to sugar-cane ethanol, a useful solution to the U.S. energy supply problem, let’s not nitpick their logic.
THE STRATEGIC PROBLEM WITH OIL is not that it has to be imported, but that it has to be imported from a relatively small group of countries, most of which are both corrupt and intrinsically somewhat hostile to the United States. Since oil production requires a large concentration of capital equipment, under extraction agreements with the host government, oil revenues tend to produce massive corruption of government officials, wasteful prestige projects and arms buildup rather than genuine economic development. Sugar-cane, on the other hand, is intrinsically a private sector crop, requires only modest capital investment and is fairly labor intensive even with modern cutting technology. Hence growth in the sugar-cane sector is likely to help development and facilitate the growth of a stable middle class in countries of the Caribbean, Central America and northern South America for which the United States has always taken a fatherly interest.
There’s a reason for the absence of sugar-cane from Bush’s speech: the demands of domestic U.S. politics. Sugar-cane growers in the Caribbean and South America are unlikely to provide significant campaign contributions, so are not a favored class. Indeed, sugar imports to the United States are currently regulated by the “Global Refined Tariff Rate Sugar” program, which prevents significant competition to coddled domestic sugar producers. Needless to say, domestic sugar producers are major campaign contributors, particularly in the key state of Florida.
“New Energy” technologies offer significant promise of replacing part of our oil consumption, and indeed must do so if we are not to suffer increasing scarcities, higher prices and eventually a shortage of this essential fuel. Nuclear energy and clean coal are important parts of the answer, but for wholesale power generation not transport. Fuel cell technology is promising, but the gasoline consumption figures of the “hybrid” Toyota Prius and its competitors appear to bear little relation in practice to those achievable in theory. Wind power is very ugly and intrinsically limited in scope, while solar power suffers from the problem that photovoltaic cells tend to overheat — hence the largest solar array in 2005 was in Leipzig, Germany, not generally thought of as a sun-seeker’s paradise. Conservation can also help, but is most effectively encouraged by the European method of high taxes on gasoline rather than by command and control edicts from politicians.
THE NEW ENERGY SECTOR IS NOT short of private funding; its “cocktail party” popularity and the pressure of the Kyoto climate change agreement has produced an ever increasing devotion of resources to research, and a huge boom in speculative investment in the last couple of years. Private equity investments alone in the New Energy sector (excluding investments by existing corporations or government or fund-raising by publicly listed companies) totaled more than $1.6 billion in over 150 transactions in 2005, double the level of the previous year.
As always with such explosive growth, much of the development in the sector is ill thought through. Indeed the popularity of the sector appears to be producing yet another bubble, and has undoubtedly attracted many sharp operators and indeed outright crooks. A boom/bust cycle appears to be inevitable, which is a pity because it could set back genuine progress in the field for a decade.
Price signals from the market and the “cocktail party” credibility of New Energy will produce oil-replacing developments at a rapid pace provided government does not impede the progress. More important than “New Energy” itself, existing technology, both to extract oil reserves from Canada and Alaska and to produce ethanol economically from sugar cane, offers most if not all the additional energy sources we need to avoid over-dependence on the unstable Middle East.
Only politics can cause a crisis, but as usual, politics appears to be driving government firmly in the direction of obstruction, waste, and economic illiteracy.